President Obama Plans to Limit Size and Risk Taking of Commercial Banks; Restrictions on Proprietary Trading Expected

January 21, 2010 at 4:48 pm Leave a comment

Multiple sources, including the American Banker and the Wall Street Journal, are reporting that President Obama will propose new limits on the size and scope of activities the nation’s largest banks are allowed to engage in.  If translated into law, Mr. Obama’s proposal would place permanent limitations on the size and scope of the nation’s “money center” banks. 

Although the Obama Administration has not released specifics, the proposal is expected to either place an outright limit on a bank’s size or to inflict serious costs on banks that exceed a certain size, making it expensive to become too large for the federal government’s liking.   These limits on size could result in some banks spinning of operations in order to become smaller.

The proposal is also likely to embrace measures, largely promoted by former Federal Reserve Chairman Paul Volcker, which would prohibit or restrict a commercial bank’s ability to engage in proprietary trading and, theoretically, prevent commercial banks from using insured deposits to gamble in equity and debt markets.  The resulting scope of permissible activities would require commercial banks with a heavy Wall Street footprint to quarantine their investment banking units from their commercial banking units, which still make loans and take deposits. The proposal would also prevent banks out of the business of running hedge funds, making direct real estate investments or housing private equity shops.

Mr. Obama’s proposal is not expected to include legislation that would resurrect Glass Steagall.

Entry filed under: Uncategorized.

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